Fwd: Why finance can’t fix climate change
Loretta Lohman
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The world of sustainable finance has changed significantly from the early 2020s, when there was widespread optimism that market forces could be tweaked to shift the global economy away from planet-warming fossil fuels. Today’s newsletter looks at one argument for what went wrong, outlined in a new paper by Lisa Sachs, director of the Columbia Center on Sustainable Investment. Plus, New York City pension funds are pushing back on SpaceX’s IPO and Elon Musk’s near-total control of the company. Subscribe to Bloomberg to get unlimited access to all our stories. Climate confusionA fundamental misunderstanding of how the finance industry operates — and the mandates and constraints of various actors — has helped to delay global climate action and stoke discontent among activists and bankers alike. That’s a key conclusion of a new paper from Lisa Sachs, director of the Columbia Center on Sustainable Investment. Sachs says the root of a lot of frustration that financial institutions face in trying to cut emissions “stems not from inaction, but from mismatches between objectives, mandates and instruments.” 
Columbia Center
on Sustainable Investment
At the beginning of this decade, many of the world’s biggest banks and asset managers pledged to align their portfolios with limiting global warming to 1.5C. But they’ve lost their appetite for supporting decarbonization. That’s partly a response to surging energy demand and changing political winds, especially in the US, but, as Sachs tells it, it’s also a response to market structures and regulatory incentives that just didn’t add up. “We’ve spent ten years fighting on the wrong playing field, spinning in accounting, metrics, measurement, disclosures, taxonomies, materiality and scopes,” Sachs said. “Even though the transition pathways, the financing barriers and even the structural solutions are already known.” Sachs said her paper is intended to bring clarity and correct misconceptions. She wrote the report with support from two Columbia researchers, Danielle Fujimoto and Quentin Harel. Sustainable finance experts at institutions including UBS Group AG, JPMorgan Chase & Co., Mitsubishi UFJ Financial Group Inc. and the Bank of England provided feedback on the material before publication. One key problem Sachs highlights is the conflation of distinct categories of risk into an overarching and ill-defined notion of ‘climate risk.’ The result is “not only conceptual confusion but incoherent governance, perverse incentives and unmanaged vulnerabilities,” she said. Sachs identifies three types of climate-related risk. They are planetary risk, which includes physical hazards such as rising temperatures, sea levels, and extreme weather; economic risk, or the reduction of output and impact on public budgets caused by global warming; and, finally, financial risk, which impairs credit quality, portfolio values and balance sheets, and can even threaten the stability of the entire financial system.  A hillside
burns near during the Palisades Fire.
Photographer:
Jill Connelly/Bloomberg
Not all risks have equal impacts. While physical risks can dent productivity and public budgets, only a subset of those effects, in turn, may transmit into financial risk by hurting asset values and credit worthiness. Meanwhile, different people are tasked with mitigating different risk types, and confusing these roles can cause additional harm. “When planetary, economic, and financial risks are conflated, so too are institutional mandates and capabilities,” said Sachs. “This conflation presses institutions to act beyond their authority, misallocates public resources, diffuses accountability, and obscures difficult trade-offs rather than allowing them to be deliberately managed.” To make matters
worse, Sachs says stress tests, risk models and
disclosure frameworks are riddled with the same problem.
For example, some central banks have suggested stress
tests can help accelerate the transition to clean
energy. But, in reality, when climate-related risks are
identified, the “rational response” from a bank would be
to “withdraw, reprice, or shorten tenor” of such
exposure, Sachs said. “The confusion is so embedded in both legal requirements and widely used frameworks that advocates, policymakers, financial institutions and standard setters are either driving or enmeshed in it,” said Sachs. “Confusions and flawed premises have intertwined and hardened.”
Oil and gas is back$36.4 billion The size of Princeton University’s endowment, which is backtracking on a pledge to divest from publicly traded oil and gas companies it made four years ago. Diverging policies“Financial institutions may need to choose between financing growth and maintaining the pace of reducing financed emissions” Barclays Plc The deep divide in how major economies are approaching the energy transition risks forcing banks to make tough choices, Barclays said in a report earlier this year. ‘There’s no precedent for this’By Olivia Raimonde, Frances Schwartzkopff, and Alastair Marsh New York City Comptroller Mark Levine says the unprecedented control that Elon Musk will have over SpaceX represents a new level of disregard for regular shareholders’ rights. “I understand that we are in an era of founders wanting more control,” Levine said in an interview. But what Musk is planning with SpaceX “is way beyond what we’ve seen.” “There’s no precedent for this,” he said.  Mark
Levine, New York City comptroller.
Photographer:
Adam Gray/Bloomberg
SpaceX, which is due to go public this week, is drawing a frenzy of interest from investors desperate to participate in what is set to be the biggest initial public offering ever undertaken. But buying into the company requires accepting a governance structure that gives Musk roughly 80% of the voting rights, while also making him chief executive and chief technical officer, as well as chair of the board. Not investing in SpaceX, which is already forcing markets to adjust around it, isn’t easy for a large, index-tracking investor. Levine, whose job entails overseeing about $300 billion in both actively and passively managed portfolios in New York city’s public pension funds, says it would be “very complicated” to exclude SpaceX. “We’ve never divested from a single company,” he said. “We’ve done sector-based exclusion only,” so blacklisting SpaceX “would be unprecedented for us and it is not simple.” Instead, Levine says he plans to push for a more democratic corporate governance process from within. Musk can’t be allowed to “disempower” shareholders, he said, adding that investment professionals in New York have told him they want him to “keep fighting on this.” A Bloomberg request for comment from SpaceX, sent by email, went unanswered. Read
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